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Azer-Turk Bank Open Joint Stock Company

Financial statements Year ended 31 December 2015 together with Independent Auditors’ Report

Azer-Turk Bank Open Joint Stock Company 2015 financial statements

Contents

Independent auditors’ report

Statement of financial position .......................................................................................................................................... 1 Statement of profit or loss ................................................................................................................................................. 2 Statement of comprehensive income ................................................................................................................................ 3 Statement of changes in equity......................................................................................................................................... 4 Statement of cash flows .................................................................................................................................................... 5

Notes to the financial statements 1. Principal activities .................................................................................................................................................. 6 2. Basis of preparation ............................................................................................................................................... 6 3. Summary of accounting policies ............................................................................................................................ 6 4. Significant accounting judgments and estimates ................................................................................................. 15 5. Cash and cash equivalents ................................................................................................................................. 16 6. Amounts due from credit institutions .................................................................................................................... 16 7. Investment securities available-for-sale ............................................................................................................... 16 8. Loans to customers ............................................................................................................................................. 17 9. Property and equipment ...................................................................................................................................... 19 10. Intangible assets.................................................................................................................................................. 19 11. Taxation ............................................................................................................................................................... 20 12. Other impairment and provisions ......................................................................................................................... 21 13. Other assets and liabilities ................................................................................................................................... 21 14. Amounts due to banks and government organizations ........................................................................................ 22 15. Amounts due to customers .................................................................................................................................. 22 16. Equity .................................................................................................................................................................. 23 17. Commitment and contingencies .......................................................................................................................... 23 18. Net fee and commission income.......................................................................................................................... 25 19. Other Income ....................................................................................................................................................... 26 20. Personnel, general and administrative expenses ............................................................................................... 26 21. Risk Management ................................................................................................................................................ 26 22. Fair value measurement ...................................................................................................................................... 34 23. Maturity analysis of assets and liabilities ............................................................................................................. 36 24. Related party disclosures .................................................................................................................................... 36 25. Capital adequacy ................................................................................................................................................. 37


Statement of profit or loss

For the year ended 31 December 2015

(Figures in tables are in thousands of Azerbaijani manats) Interest income Loans to customers 12,569 10,428 Investment securities available-for-sale 428 565

Amounts due from credit institutions 272 690

13,269 11,683

Interest expense Amounts due to customers (5,922) (2,439) Amounts due to banks and government organizations (4,297) (1,045)

Repurchase agreements (45) (20)

(10,264) (3,504)

Net interest income 3,005 8,179

Allowance for loan impairment 8 (6,623) (2,108)

Net interest income after allowance for loan impairment (3,618) 6,071

Net fee and commission income 18 1,035 1,132 Net gains from foreign currency operations 9,859 570

Other income 19 1,180 −

Non-interest income 12,074 1,702

Personnel expenses 20 (6,658) (3,037) General and administrative expenses 20 (4,150) (2,157) Depreciation and amortization 9, 10 (782) (198) Impairment of investment securities available-for-sale 7 (175) -

Other impairment and provisions 12 (462) (342)

Non-interest expenses (12,227) (5,734)

(Loss)/profit before tax (3,771) 2,039

Income tax benefit/(expense) 11 600 (411)

(Loss)/profit for the year (3,171) 1,628


Statement of comprehensive income


(Figures in tables are in thousands of Azerbaijani manats) Notes 2015 2014

(Loss)/profit for the year (3,171) 1,628

Other comprehensive income Other comprehensive income to be reclassified to profit or loss in

subsequent periods: Unrealised (losses)/gains on investment securities available-for-

sale (175)

31 Realised gains on investment securities available-for-sale

reclassified to the statement of profit or loss (31) − Impairment of investment securities available-for-sale reclassified

to the statement of profit or loss 7 175 −

Income tax effect 11 6 (6)

Net other comprehensive (loss)/income to be reclassified to profit or loss in subsequent periods (25) 25

Total comprehensive (loss)/income for the year (3,196) 1,653


Statement of changes in equity


(Figures in tables are in thousands of Azerbaijani manats)

Share capital

Unrealized gain on

investment securities

available-for-sale

Accumulated deficit

Total Equity

31 December 2013 13,447 − (2,548) 10,899

Profit for the year − − 1,628 1,628

Other comprehensive income for the year − 25 − 25

Total comprehensive income for the year − 25 1,628 1,653

Issue of share capital (Note 16) 36,553 − − 36,553

Dividends to shareholders of the Bank (Note 16) − − (1,864) (1,864)

31 December 2014 50,000 25 (2,784) 47,241

Loss for the year − − (3,171) (3,171)

Other comprehensive loss for the year − (25) − (25)

Total comprehensive loss for the year − (25) (3,171) (3,196)

Cancellation of dividends to shareholders of the Bank (Note 16) − −

1,864 1,864

31 December 2015 50,000 − (4,091) 45,909


Statement of cash flows


(Figures in tables are in thousands of Azerbaijani manats) Notes 2015 2014

Cash flows from operating activities Interest received 10,913 10,774 Interest paid (3,350) (3,428) Fees and commissions received 3,697 1,543 Fees and commissions paid (2,427) (411) Net realized gains from currency dealing operations 5,611 620 Personnel expenses paid (6,446) (3,051) General and administrative expenses paid (4,143) (2,142)

Other income 10 -

Cash flows from operating activities before changes in operating assets and liabilities 3,865 3,905

Net (increase)/decrease in operating assets Amounts due from credit institutions (17,819) 10,855 Loans to customers (30,917) (152,907) Other assets 2,125 33 Net increase/(decrease) in operating liabilities Amounts due to banks and government organizations 2,964 149,861 Amounts due to customers 119,800 11,936

Other liabilities (2,646) 1,290

Net cash flows from operating activities before income tax 77,372 24,973

Income tax paid (145) (703)

Net cash from operating activities 77,227 24,270

Cash flows from investing activities Purchase of investment securities available-for-sale (29,000) (28,119) Proceeds from sale and redemption of investment securities

available-for-sale 43,572 20,168 Purchase of property and equipment (6,452) (487)

Acquisition of intangible assets (1,220) (571)

Net cash from/(used in) investing activities 6,900 (9,009)

Cash flows from financing activities Proceeds from issue of share capital 16 − 36,553

Net cash from financing activities − 36,553

Effect of exchange rates changes on cash and cash equivalents 77,659 (477)

Net increase in cash and cash equivalents 161,786 51,337

Cash and cash equivalents, beginning 66,185 14,848

Cash and cash equivalents, ending 5 227,971 66,185

Non-cash transactions performed by the Bank comprise the following:

2015 2014

Withholding tax on interest income − 44

Azer-Turk Bank Open Joint Stock Company Notes to 2015 financial statements


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1. Principal activities Azer-Turk Bank Open Joint Stock Company (the “Bank”) was incorporated in the Republic of Azerbaijan in May 1995. The Bank is regulated by the Central Bank of the Republic of Azerbaijan (the “CBAR”) and conducts its business under license number 234. The Bank’s principal business activity is corporate and retail banking operations. This includes deposit taking and commercial lending in freely convertible currencies and in Azerbaijani manat (“AZN”), transfer payments in Azerbaijan and abroad, support of clients’ export/import transactions, foreign currency exchange and other banking services to its commercial and retail customers.

As at 31 December 2015, the Bank’s network comprised of head office, 1 customer service department, 5 branches and 1 unit service (2014: head office, 1 customer service department and 4 branches).

The number of Bank’s employees as at 31 December 2015 was 313 (2014: 167). The Bank’s registered address is 85 J.Mammadguluzade street 192/193, Baku, AZ1078, Azerbaijan. As at 31 December, the following shareholders owned the outstanding shares of the Bank: Shareholder 2015, % 2014, %

Government of the Republic of Azerbaijan 75.00 75.00 T.C. Ziraat Bankasi A.Ş. 12.37 12.37 “AzRe Reinsurance” OJSC 6.55 6.55 “Qala Life” Insurance Company OJSC 5.00 5.00 “Ziraat Bank International AG” 1.08 1.08

Total 100.00 100.00

As at 31 December 2015 and 2014, the ultimate shareholder of the Bank is the Government of the Republic of Azerbaijan as represented by the State Committee on Property Issues of Azerbaijan Republic (the “Government”).

2. Basis of preparation

General These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The Azerbaijani manat (“AZN”) is the functional and presentation currency of the Bank as the majority of transactions are denominated, measured, or funded in AZN. Transactions in other currencies are treated as transactions in foreign currencies. The Bank is required to maintain its records and prepare its financial statements in AZN and in accordance with IFRS. The financial statements are presented in thousands of AZN except per share amounts and unless otherwise indicated. The financial statements have been prepared under the historical cost convention except for investment securities available-for-sale which has been measured at fair value.

3. Summary of accounting policies

Changes in accounting policies The Bank has adopted the following amended IFRS which are effective for annual periods beginning on or after 1 January 2015: Annual improvements 2010-2012 cycle These improvements are effective from 1 July 2014 and the Bank has applied these amendments for the first time in these financial statements. They include:

IFRS 13 Short-term Receivables and Payables − Amendments to IFRS 13

This amendment to IFRS 13 clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This is consistent with the Bank’s current accounting policy, and thus this amendment does not impact the Bank’s accounting policy.



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3. Summary of accounting policies (continued)

Changes in accounting policies (continued)

IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets

The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference to observable data on either the gross or the net carrying amount. In addition, the accumulated depreciation or amortisation is the difference between the gross and carrying amounts of the asset. This amendment does not impact the Bank’s accounting policy.

IAS 24 Related Party Disclosures

The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment had no impact for the Bank as does not receive any management services from other entities during prior periods and in 2015.

Annual improvements 2011-2013 cycle

These improvements are effective from 1 July 2014 and the Bank has applied these amendments for the first time in these financial statements. They include:

IFRS 13 Fair Value Measurement

The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (or IAS 39, as applicable). The Bank does not apply the portfolio exception in IFRS 13.

Fair value measurement

The Bank measures available-for-sale securities at fair value at each balance sheet date. Also, fair values of financial instruments measured at amortized cost are disclosed in Note 22.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• In the principal market for the asset or liability; or

• In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Bank. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

• Level 1 − Quoted (unadjusted) market prices in active markets for identical assets or liabilities;

• Level 2 − Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable;

• Level 3 − Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Bank determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.



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3 Summary of accounting policies (continued)

Financial assets

Initial recognition

Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate.

The Bank determines the classification of its financial assets upon initial recognition, and subsequently can reclassify financial assets in certain cases as described below.

Date of recognition

All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Bank commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available-for-sale. Such assets are carried at amortized cost using the effective interest method. Gains and losses are recognized in profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognized in other comprehensive income until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the statement of profit or loss. However, interest calculated using the effective interest method is recognized in profit or loss.

Reclassification of financial assets If a non-derivative financial asset classified as held for trading is no longer held for the purpose of selling in the near term, it may be reclassified out of the fair value through profit or loss category in one of the following cases:

• A financial asset that would have met the definition of loans and receivables above may be reclassified to loans and receivables category if the Bank has the intention and ability to hold it for the foreseeable future or until maturity;

• Other financial assets may be reclassified to available for sale or held to maturity categories only in rare circumstances.

A financial asset classified as available for sale that would have met the definition of loans and receivables may be reclassified to loans and receivables category of the Bank has the intention and ability to hold it for the foreseeable future or until maturity.

Financial assets are reclassified at their fair value on the date of reclassification. Any gain or loss already recognized in profit or loss is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, amounts due from the CBAR, excluding obligatory reserves, and amounts due from credit institutions that mature within ninety days of the date of origination and are free from contractual encumbrances.

Borrowings

Issued financial instruments or their components are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to banks and government organizations and amounts due to customers. After initial recognition, borrowings are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized in profit or loss when the borrowings are derecognized as well as through the amortization process.



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Repurchase and reverse repurchase agreements and securities lending

Sale and repurchase agreements (“repos”) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are retained in the separate statement of financial position and, in case the transferee has the right by contract or custom to sell or re-pledge them, reclassified as securities pledged under sale and repurchase agreements. The corresponding liability is presented within amounts due to credit institutions or customers. Securities purchased under agreements to resell (“reverse repo”) are recorded as separate account on the separate statement of financial position if material or as cash and cash equivalents or loans to customers as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method.

Leases Operating − Bank as lessee

Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognized as expenses on a straight-line basis over the lease term and included into other operating expenses.

Measurement of financial instruments at initial recognition When financial instruments are recognized initially, they are measured at fair value, adjusted, in the case of instruments not at fair value through profit or loss, for directly attributable fees and costs. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price. If the Bank determines that the fair value at initial recognition differs from the transaction price, then:

• if the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a valuation technique that uses only data from observable markets, the Bank recognizes the difference between the fair value at initial recognition and the transaction price as a gain or loss;

• in all other cases, the initial measurement of the financial instrument is adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, the Bank recognizes that deferred difference as a gain or loss only when the inputs become observable, or when the instrument is derecognized.

Offsetting of financial instruments Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. The right of set-off must not be contingent on a future event and must be legally enforceable in all of the following circumstances:

• the normal course of business;

• the event of default; and

• the event of insolvency or bankruptcy of the entity and all of the counterparties. These conditions are not generally met in master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position.

Impairment of financial assets The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.



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Impairment of financial assets (continued) Amounts due from credit institutions and loans to customers For amounts due from credit institutions and loans to customers carried at amortized cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the statement of profit or loss.

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank’s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group or their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Available-for-sale financial investments For available-for-sale financial investments, the Bank assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition coast and the current fair value, less any impairment loss on that investment previously recognized in profit or loss – is reclassified from other comprehensive income to the statement of profit or loss. Impairment losses on equity investments are not reversed through the statement of profit or loss; increases in their fair value after impairment are recognized in other comprehensive income.

In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded in the statement of profit or loss. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the statement of profit or loss.



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Impairment of financial assets (continued) Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. The accounting treatment of such restructuring is as follows:

• If the currency of the loan has been changed the old loan is derecognized and the new loan is recognized.

• If the loan restructuring is not caused by the financial difficulties of the borrower the Bank uses the same approach as for financial liabilities described below.

• If the loan restructuring is due to the financial difficulties of the borrower and the loan is impaired after restructuring, the Bank recognizes the difference between the present value of the new cash flows discounted using the original effective interest rate and the carrying amount before restructuring in the allowance charges for the period. In case loan is not impaired after restructuring the Bank recalculates the effective interest rate.

Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original or current effective interest rate.

Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where:

• the rights to receive cash flows from the asset have expired;

• the Bank has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; and

• the Bank either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Bank’s continuing involvement is the amount of the transferred asset that the Bank may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Bank’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the statement of profit or loss.



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Derecognition of financial assets and liabilities (continued)

Financial guarantees In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognized in the financial statements at fair value, in “Other liabilities”, being the fee received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required settling any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is taken to the statement of profit or loss. The premium received is recognized in profit or loss on a straight-line basis over the life of the guarantee.

Taxation The current income tax expense is calculated in accordance with the regulations of the Republic of Azerbaijan. Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted at the reporting date. Current and deferred taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity, respectively. In addition, there are various operating taxes in Azerbaijan such as VAT, property tax, withholding tax and others which become relevant as a result of the Bank’s operations. These taxes are included as a component of general and administrative expenses.

Property and equipment Property and equipment are carried at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and any accumulated impairment. Such cost includes the cost of replacing part of equipment when that cost is incurred if the recognition criteria are met. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

Depreciation of an asset begins when it is available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

Years

Furniture and fixtures 5-8 Computer 4-5 Vehicles 5-6 Other Fixed Assets 5 Leasehold Improvements 14

The asset’s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year-end. Costs related to repairs and renewals are charged when incurred and included in other operating expenses, unless they qualify for capitalization.



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Intangible assets Intangible assets include computer software and licenses. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic lives of two to ten years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortization periods and methods for intangible assets with indefinite useful lives are reviewed at least at each financial year-end.

Provisions

Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made.

Retirement and other employee benefit obligations The Bank does not have any pension arrangements separate from the State pension system of the Republic of Azerbaijan, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged in the period the related salaries are earned. In addition, the Bank does not provide post-retirement benefits to its employees.

Share capital Share capital Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par value of shares issued is recognized as additional paid-in capital. Dividends Dividends are recognized as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the financial statements are authorized for issue.

Contingencies Contingent liabilities are not recognized in the statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the statement of financial position but disclosed when an inflow of economic benefits is probable.

Recognition of income and expenses Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

Interest and similar income and expense For all financial instruments measured at amortized cost and interest bearing securities classified as trading or available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount.



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Recognition of income and expenses (continued)

Fee and commission income

The Bank earns fee and commission income from a diverse range of services it provides to its customers. These fees include commission income for provision of the following services: cash withdrawals, settlement operations, fees charged for transactions with plastic cards and etc. Fee and commission expense consists of expenses related to plastic cards, cash, settlements with customers and securities operations.

Dividend income

Revenue is recognized when the Bank’s right to receive the payment is established.

Foreign currency translation The financial statements are presented in Azerbaijani manat, which is the Bank’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognized in the statement of profit or loss as net gain/(losses) from foreign currencies − translation differences. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Differences between the contractual exchange rate of a transaction in a foreign currency and the CBAR exchange rate on the date of the transaction are included in net gain/(losses) from foreign currency transactions.

The Bank used the following official exchange rates at 31 December in the preparation of these financial statements:

31 December

2015 31 December

2014

1 US dollar AZN 1.5594 AZN 0.7844 1 euro AZN 1.7046 AZN 0.9522

Standards and interpretations issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s financial statements are disclosed below:

IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous

versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. The adoption of IFRS 9 will have an effect on the classification and measurement of the Bank’s financial assets, but no impact on the classification and measurement of the Bank’s financial liabilities. IFRS 15 Revenue from Contracts with Customers

IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Revenue arising from lease contracts within the scope of IAS 17 Leases, insurance contracts within the scope of IFRS 4 Insurance Contracts and financial instruments and other contractual rights and obligations within the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments, if early adopted) is out of IFRS 15 scope and is dealt by respective standards.

Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue.



15


Standards and interpretations issued but not yet effective (continued)

The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2017 with early adoption permitted. The Bank is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date.

Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation

The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. The amendments are effective prospectively for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Bank given that the Bank has not used a revenue-based method to depreciate its non-current assets.

Annual improvements 2012-2014 cycle

These improvements are effective on or after 1 January 2016 and are not expected to have a material impact on the Bank. They include:

IFRS 7 Financial Instruments: Disclosures − Servicing Contracts

IFRS 7 requires an entity to provide disclosures for any continuing involvement in a transferred asset that is derecognized in its entirety. The Board was asked whether servicing contracts constitute continuing involvement for the purposes of applying these disclosure requirements. The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and arrangement against the guidance for continuing involvement in paragraphs IFRS 7.B30 and IFRS 7.42C in order to assess whether the disclosures are required. The amendment must be applied for annual periods beginning on or after 1 January 2016, with earlier application permitted. The amendment is to be applied such that the assessment of which servicing contracts constitute continuing involvement will need to be done retrospectively. However, the required disclosures would not need to be provided for any period beginning before the annual period in which the entity first applies the amendments.

4. Significant accounting judgments and estimates

In the process of applying the Bank’s accounting policies, management has made the following judgments, apart from those involving estimates, which have the most significant effect on the amounts recognized in the financial statements:

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Additional details are provided in Note 22.

Allowance for loan impairment

The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its experienced judgment to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Bank uses its experienced judgment to adjust observable data for a group of loans or receivables to reflect current circumstances.

Deferred tax assets

Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. If actual results differ from those estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected. In the event that an assessment of future utilization indicates that the carrying amount of deferred tax assets must be reduced, this reduction is recognized in the statement of profit or loss.



16

5. Cash and cash equivalents Cash and cash equivalents comprise: 2015 2014

Cash on hand 100,960 18,306 Current accounts with the CBAR 64,533 33,008 Current accounts with other banks 62,478 14,871

Cash and cash equivalents 227,971 66,185

Current accounts with other banks consist of correspondent account balances with resident and non-resident banks in the amount of AZN 47,701 thousand (2014: AZN 42 thousand) and AZN 14,777 thousand (2014: AZN 14,829 thousand), respectively.

6. Amounts due from credit institutions

Amounts due from credit institutions comprise:

2015 2014

Blocked accounts with credit institutions 10,379 -

Time deposits for more than 90 days 8,737 158

Loans to credit institutions 1,841 300

Obligatory reserve with the CBAR 1,617 888

Amounts due from credit institutions 22,574 1,346

As at 31 December 2015, blocked accounts with credit institutions represented funds blocked by one non-resident credit institution against letters of credit issued to one customer.

As at 31 December 2015, inter-bank time deposits include AZN 8,737 thousand (2014: AZN 158 thousand) placed in two resident banks (2014: one resident bank).

As at 31 December 2015, loans to credit institutions include AZN 1,841 thousand (2014: AZN 300 thousand) issued to two resident non-bank credit institutions (2014: one resident bank).

Credit institutions are required to maintain a non-interest earning cash deposit (obligatory reserve) with the CBAR at 0.5% (2014: 2%) of the previous month average of attracted funds by the credit institution in local and foreign currency, respectively. The Bank’s ability to withdraw such deposit is restricted by statutory legislation.

7. Investment securities available-for-sale

Investment securities available-for-sale comprises:

2015 2014

Notes issued by the Azerbaijan Mortgage Fund − 9,999 Corporate bonds − 4,775

Corporate shares 283 455

Total investment securities available-for-sale 283 15,229

The Bank recognized an impairment loss of AZN 175 thousand (2014: nil) on available-for-sale securities for the year ended 31 December 2015.



17

7. Investment securities available-for-sale (continued) The corporate shares available-for-sale are:

2015 2014

Name Nature of business

Country of registration Fair value % share Fair value % share

Bashak Inam Insurance Company

Insurance services

Republic of Azerbaijan 175 5.83% 350 5.83%

Milli Kart Processing Center

Plastic cards processing

center Republic of Azerbaijan 48 2.40% 45 2.40%

Baku Stock Exchange Stock

exchange Republic of Azerbaijan 60 5.00% 60 5.00%

283 455

8. Loans to customers

Loans to customers comprise:

2015 2014

Government-related loans 325,834 155,026 Corporate loans 48,175 22,639 Loans to individuals-consumer 25,845 31,698 Loans to individuals-entrepreneurship 14,697 4,617 Loans to individuals-mortgage 5,616 753

Gross loans to customers 420,167 214,733

Less: allowance for impairment (18,386) (12,180)

Loans to customers 401,781 202,553

Allowance for impairment of loans to customers

A reconciliation of the allowance for impairment of loans to customers by class is as follows:

Government-related loans

Corporate loans

Loans to individuals-consumer

Loans to individuals-

entrepreneurship

Loans to individuals-mortgage Total

At 1 January 2015 − (5,833) (5,148) (1,191) (8) (12,180)

Charge for the year (986) (3,617) (170) (1,813) (37) (6,623)

Amounts written off − 417 − − − 417

At 31 December 2015 (986) (9,033) (5,318) (3,004) (45) (18,386)

Individual impairment − (5,966) − (1,825) − (7,791)

Collective impairment (986) (3,067) (5,318) (1,179) (45) (10,595)

(986) (9,033) (5,318) (3,004) (45) (18,386)

Gross amount of loans,

individually determined to be impaired, before deducting any individually assessed impairment allowance − 10,410 − 4,373 − 14,783



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8. Loans to customers (continued)

Government-related loans

Corporate loans

Loans to individuals-consumer

Loans to individuals-

entrepreneurship

Loans to individuals-mortgage Total

At 1 January 2014 − 6,566 2,554 944 8 10,072

Charge for the year − (733) 2,594 247 − 2,108

At 31 December 2014 − 5,833 5,148 1,191 8 12,180

Individual impairment − 4,016 - 698 − 4,714

Collective impairment − 1,817 5,148 493 8 7,466

− 5,833 5,148 1,191 8 12,180

Gross amount of loans,

individually determined to be impaired, before deducting any individually assessed impairment allowance − 6,180 − 1,284 − 7,464

Individually impaired loans Interest income on impaired loans for the year ended 31 December 2015, comprised AZN 806 thousand (2014: AZN 570 thousand). In accordance with the CBAR requirements, loans may only be written off with the approval of the Supervisory Board and, in certain cases, with the respective decision of the Court.

Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are cash, charges over real estate properties, vehicles and third party guarantees.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for loan impairment.

Concentration of loans to customers Loans are made principally in the following industry sectors: 2015 2014

Transport 314,248 155,251

Individuals 31,461 32,451

Manufacturing 22,932 3,228

Real estate construction 14,649 1,007

Trading enterprises 12,827 5,467

Agriculture and food processing 10,867 10,511

Other 13,183 6,818

Loans to customers, gross 420,167 214,733

Corporate loan granted to a local government-related entity in transport sector amounting to AZN 308,047 thousand (2014: AZN 155,026 thousand) was provided by the funds received from the Ministry of Finance of the Republic of Azerbaijan. This loan led to the breach of the maximum credit exposure limit (see details in Note 17). As at 31 December 2015, the Bank had a concentration of loans represented by AZN 349,196 thousand or 83% of gross loan portfolio (2014: AZN 167,235 thousand or 78%) due from ten (2014: ten) largest borrowers of the Bank. An allowance of AZN 5,157 thousand (2014: AZN 3,780 thousand) was recognized against these loans.



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9. Property and equipment

The movements in property and equipment were as follows:

Furniture and

fixtures Computer Vehicles Other fixed

Assets Leasehold

Improvements Total

Cost 31 December 2013 481 389 146 64 − 1,080

Additions 121 365 − 1 − 487

Disposals − (1) − − − (1)

31 December 2014 602 753 146 65 − 1,566

Additions 2,059 866 814 183 2,430 6,352

Disposals (21) (6) (1) (7) − (35)

31 December 2015 2,640 1,613 959 241 2,430 7,883

Accumulated depreciation

31 December 2013 (241) (251) (58) (22) − (572)

Depreciation charge (60) (97) (17) (7) − (181)

Disposals − 1 − − − 1

31 December 2014 (301) (347) (75) (29) − (752)

Depreciation charge (277) (189) (133) (25) (73) (697)

Disposals 21 6 1 7 - 35

31 December 2015 (557) (530) (207) (47) (73) (1,414)

Net book value

31 December 2013 240 138 88 42 − 508

31 December 2014 301 406 71 36 − 814

31 December 2015 2,083 1,083 752 194 2,357 6,469

As at 31 December 2015, property and equipment amounting to AZN 301 thousand (2014: AZN 79 thousand) were fully depreciated.

10. Intangible assets The movements in intangible assets were as follows:

Licenses Computer software Total

Cost 31 December 2013 70 12 82

Additions 149 120 269

Disposals (2) − (2)

31 December 2014 217 132 349

Additions 179 1,126 1,305

31 December 2015 396 1,258 1,654

Accumulated amortization 31 December 2013 (22) (5) (27)

Amortization charge (15) (2) (17) Disposals 1 − 1

31 December 2014 (36) (7) (43)

Amortization charge (64) (21) (85)

31 December 2015 (100) (28) (128)

Net book value

31 December 2013 48 7 55

31 December 2014 181 125 306

31 December 2015 296 1,230 1,526



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11. Taxation The corporate income tax charge comprises: 2015 2014

Current tax charge (74) (28) Deferred tax benefit/(charge) 680 (389)

Less: deferred tax recognized in other comprehensive income (6) 6

Income tax benefit / (charge) 600 (411)

Deferred tax related to items credited to other comprehensive income during the year is as follows:

2015 2014

Investment securities available for sale 6 (6)

Income tax charged to other comprehensive income 6 (6)

The effective income tax rate differs from the statutory income tax rates. A reconciliation of the income tax charge based on statutory rates with actual is as follows: 2015 2014

Profit/(loss) before tax (3,771) 2,039

Statutory tax rate 20% 20%

Theoretical income tax (charge)/benefit at the statutory rate 754 (408)

Prior year tax expense actualization (74) -

Tax effect of non-deductible expenses (95) (23)

Other 15 20

Income tax benefit / (charge) 600 (411)

Deferred tax assets and liabilities as of 31 December 2015 and their movements for the respective years comprise:

2013

Origination and reversal of temporary differences 2014

Origination and reversal of temporary differences 2015

In the statement of profit or

loss

In other compre-hensive income

In the statement of profit or

loss

In other compre-hensive income

Tax effect of deductible temporary differences

Loans to customers 1,164 (408) − 756 113 − 869 Losses available for offset

against future taxable income − − − − 1,078 − 1,078 Investment securities available-

for-sale − − − − 35 − 35 Intangible assets − 5 − 5 − − 5 Other liabilities − 43 − 43 161 − 204

Other assets − 65 − 65 (65) − −

Deferred tax assets 1,164 (295) − 869 1,322 − 2,191

Tax effect of taxable temporary

differences Cash and cash equivalents − − − − (125) − (125) Amounts due from credit

institutions (26) (4) − (30) (11) − (41) Amount due to customers − − − − (353) − (353) Loan to customers − − − − (35) − (35) Intangible Assets − (8) − (8) (10) − (18) Property and equipment (10) (6) (16) (79) (95) Investment securities (1) (46) (6) (53) 47 6 − Other Assets (63) − − (63) 15 − (48)

Other liabilities − (24) − (24) (97) − (121)

Deferred tax liabilities (100) (88) (6) (194) (648) 6 (836)

Net deferred tax asset 1,064 (383) (6) 675 674 6 1,355



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12. Other impairment and provisions The movements in other impairment allowances and provisions were as follows:

Other assets

(Note 13)

Guarantees and commitments

(Note 13, 17) Total

31 December 2013 − − −

Charge (302) (40) (342)

31 December 2014 (302) (40) (342)

Charge − (462) (462)

Write-offs 302 − 302

31 December 2015 − (502) (502)

Allowance for impairment of other assets is deducted from the carrying amounts of the related assets. Provisions for guarantees and commitments are recorded in other liabilities.

13. Other assets and liabilities

Other assets comprise:

2015 2014

Other financial assets Settlements on operations with plastic cards 190 93

Settlements on money transfers 9 9

Total other financial assets 199 102

Other non-financial assets Repossessed collaterals 620 524 Deferred expenses 192 67

Prepayments for acquisition of property, equipment and intangible assets 100 302

Total other non-financial assets 912 893

Less: allowance for impairment of other assets (Note 12) − (302)

Other assets 1,111 693

Other liabilities comprise: 2015 2014

Other financial liabilities Funds in settlement 1,847 1,368

Dividends payable 51 1,915

Total other financial liabilities 1,898 3,283

Other non-financial liabilities Provision for contingent liabilities (Note 12) 502 40 Payable to employees 253 41 Deferred income 235 2 Taxes, other than income tax 197 120

Accrued expenses 145 32

Total other non-financial liabilities 1,332 235

Other liabilities 3,230 3,518



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14. Amounts due to banks and government organizations Amounts due to banks and government organizations comprise: 2015 2014

Time deposits and loans 322,612 161,379 Blocked accounts 10,422 1,299 Current accounts 6,900 5,136 Loans received from the National Fund for Support of Entrepreneurship 6,659 7,940 Amounts due to the Azerbaijan Mortgage Fund 4,648 752

Loans received from Black Sea Trade and Development Bank 2,143 1,618

Amounts due to banks and government organizations 353,384 178,124

Held as security against guarantees and letter of credits (Note 17) 10,422 1,255 As at 31 December 2015, the Bank had time deposit placed by the Ministry of Finance in the amount of AZN 308,571 (2014: AZN 155,024) thousand that matures during 2016 and bears interest rate of monthly LIBOR plus 1.75% p.a. The fund was used for refinancing loan to one related party company. The loan issued matures in 2016 and bears interest rate of 2% plus monthly LIBOR p.a. On 23 December 2010, the Bank signed a credit agreement with the National Fund for Support of Entrepreneurship, a program under the Ministry of Economic Development of the Republic of Azerbaijan, for financing of small and medium sized enterprises. Under this program, funds are made available to the Bank at an interest rate of 1% p.a. (2014: 1% p.a.) which matures through 2016-2021 (2014: 2015-2020). The Bank uses these funds to issue loans to eligible borrowers at rate of 6% p.a. On 20 December 2006, the Bank signed a credit agreement with the Azerbaijan Mortgage Fund, a program under the CBAR, for granting long term mortgage loans to individuals. Under this program, funds are made available to the Bank at an interest rate of 1%-4% p.a. (2014: 1%-4% p.a.) which matures through in 2017-2045 (2014: 2022-2037). The Bank relends these funds to eligible borrowers at rates not higher than 8.0% p.a. The loan agreement with Black Sea Trade and Development Bank contains restrictive covenants, including covenants relating to limitations on liens, dispositions, issuance of debt, profit sharing agreements, sale of asset or merger and others, and financial performance covenants. As at 31 December 2015, the Bank was in breach of the restrictions that limit the maximum exposure of the Bank to any single party, to any single party who is connected party and to connected parties. As a result of the breach, the lender can demand immediately full settlement of the loan and it is classified as “on demand”. No claims have been raised by the Black Sea Trade and Development Bank in respect of the breach of covenant under this agreement to date. Subsequently on 22 February 2016 the Bank received a letter from Black Sea Trade and Development Bank stating that lender agrees not to exercise its right to require compliance with the covenants in breach as at 31 December 2015.

15. Amounts due to customers The amounts due to customers include the following: 2015 2014

Current accounts 123,805 22,891

Time deposits 137,250 36,464

Amounts due to customers 261,055 59,355

Held as security against guarantees (Note 17) 25 14 At 31 December 2015, the Bank had amounts due to 10 (2014: 10) largest customers with aggregate balance of AZN 181,517 thousand or 70% of total amounts due to customers (2014: AZN 32,797 thousand or 55%).



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15. Amounts due to customers (continued)

Customer accounts by economic sectors are as follows: 2015 2014

Individuals 181,041 31,258 Insurance companies and other non-bank financial institutions 33,731 9,172 Transportation and communication 16,189 1,944 State and public organizations 15,557 799 Trade and service 11,747 4,600 Construction 2,089 11,399 Manufacturing 669 121 Agriculture 8 2

Other 24 60

Amounts due to customers 261,055 59,355

16. Equity Movements in ordinary shares outstanding, issued and fully paid were as follows:

Number of

ordinary shares

Nominal amount per ordinary

share, Azerbaijani manat

Total, Azerbaijani manat

31 December 2013 13,447,318 1 13,447,318

Increase in share capital 36,552,682 36,552,682

31 December 2014 50,000,000 1 50,000,000

Increase in share capital − −

31 December 2015 50,000,000 1 50,000,000

According to the decision of the General Shareholders’ Meeting held on 8 December 2014, the authorized share capital increased by AZN 36,553 thousand from AZN 13,447 thousand to AZN 50,000 thousand. The ordinary shares were issued and purchased in cash by the existing shareholders for 1 Azerbaijani manat per ordinary share. Official registration of shares at State Securities Committee of the Republic of Azerbaijan was finalized on 15 December 2014, thus, authorized, issued and fully paid up capital comprised of 50,000,000 ordinary shares with nominal amount of 1 Azerbaijani manat per ordinary share as at 31 December 2015 and 2014. Each ordinary share carries one vote. The share capital of the Bank was contributed by shareholders in Azerbaijani manat and they are entitled to dividends and any capital distribution in Azerbaijani manat. According to the decision of the General Shareholders’ Meeting held on 2 September 2014, the Bank declared dividends in respect of the year ended 31 December 2013, totalling AZN 1,864 thousand.

On 31 July 2015, General Shareholders’ Meeting cancelled its decision to pay dividends dated 2 September 2014 of AZN 1,864 thousand.

17. Commitment and contingencies

Operating environment

Azerbaijan continues economic reforms and development of its legal, tax and regulatory frameworks as required by the market economy. The future stability of the Azerbaijan economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government. As a result of significant drop in crude oil prices, Azerbaijani manat devalued against the US dollar from AZN 0.7862 to AZN 1.0500 for 1 USD on 21 February 2015 and further to AZN 1.5500 for 1 USD on 21 December 2015.



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17. Commitment and contingencies (continued)

Operating environment (continued) These events resulted in worsening of liquidity in the banking system and much tighter credit conditions. There continues to be uncertainty regarding economic growth, access to capital and cost of capital which could adversely affect the Bank’s future results and financial position and business prospects in a manner not currently determinable. Azerbaijani government announced plans to accelerate reforms and support to banking system in response to current economic challenges. The Bank’s Management is monitoring these developments in the current environment and taking precautionary measures it considered necessary in order to support the sustainability and development of the Bank’s business in the foreseeable future.

Legal In the ordinary course of business, the Bank is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Bank.

Taxation Tax legislation in Azerbaijan is subject to varying interpretations, and changes can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant authorities. Recent events within the Republic of Azerbaijan suggest that the tax authorities may be taking a more assertive position in their interpretation and application of this legislation and assessments. It is therefore possible that transactions and activities of the Bank that have not been challenged in the past may be challenged at any time in the future. As a result, significant additional taxes, penalties and interest may be assessed by the relevant authorities. Fiscal periods remain open and subject to review by the tax authorities for a period of three calendar years immediately preceding the year in which the decision to conduct a tax review is taken. The last tax audit covered 2014 financial year. Management’s interpretation of the relevant legislation as at 31 December 2015 is appropriate and the Bank’s tax, currency and customs positions will be sustained.

Insurance The Bank has not currently obtained insurance coverage related to liabilities arising from errors or omissions. Liability insurance is generally not available in Azerbaijan at present.

Compliance with CBAR ratios CBAR requires banks to maintain certain prudential ratios computed based on statutory financial statements. As at 31 December 2015, the Bank was in compliance with these ratios except for ratio of:

• Maximum credit exposure of a bank per a single borrower or a group of related borrowers that should not exceed 20 percent of the bank’s Tier 1 capital when the market value of the security of credit exposures is not less than 100 percent of such credit exposures, or the market value of real estate collateral of loans is not below 150% of the loan value. As at 31 December 2015, the Bank’s ratio was 672% (2014: 301%).

• Maximum credit exposure of a bank per a single borrower or a group of related borrowers that should not exceed 7 percent of the bank’s Tier 1 capital when the market value of the security of credit exposures is less than 100 percent of such credit exposures, or the market value of real estate collateral of loans is below 150% of the loan value. As at 31 December 2015, the Bank’s ratio was 87% (2014: less than 7%).

The aforementioned breach of the CBAR ratio is related to specific government funded projects and government organizations. Throughout the year the Bank submitted information to CBAR regarding this breach on a monthly basis and no sanctions were ever applied to the Bank. Additionally, on 29 December 2015 the Bank received a letter from CBAR that no sanctions are considered against the Bank for the breach. The Management believes that the Bank will not face any sanctions in the future.



25

17. Commitment and contingencies (continued) Financial commitments and contingencies The Bank provides guarantees and letters of credit to customers with primary purpose of ensuring that funds are available to a customer as required. Guarantees and standby letters of credit represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods, to which they relate, or cash deposits and, therefore, carry less risk than a direct borrowing. The undrawn loan commitment agreements stipulate the right of the Bank to unilaterally withdraw from the agreement should any conditions unfavourable to the Bank arise, including change of the refinance rate, inflation, exchange rates and others. The Bank requires collateral to support credit-related financial instruments when it is deemed necessary. Collateral held varies, but may include bank deposits, government securities, securities of the leading financial institutions and other assets. As at 31 December, the Bank’s financial commitments and contingencies comprised the following:

2015 2014

Credit related commitments

Guarantees 59,842 7,347 Undrawn loan commitments 14,157 7,239 Letters of credit 11,290 −

85,289 14,586

Operating lease commitments

Not later than 1 year 157 223 Later than 1 year but not later than 5 years - 148

Less: provisions (502) (40)

(345) 331

Commitments and contingencies (before deducting collateral) 84,944 14,917

Less: deposits held as security against letters of guarantee (Note 14,15) (10,447) (1,269)

Commitments and contingencies 74,497 13,648

18. Net fee and commission income

Net fee and commission income comprises:

2015 2014

Cash operations 1,734 297 Settlements operations 737 454 Servicing plastic card operations 461 400 Guarantees and commitments 408 296

Other 122 96

Fee and commission income 3,462 1,543

Cash operations (1,704) (45) Servicing plastic card operations (518) (223) Settlements operations (121) (123) Securities operations (23) (19)

Other (61) (1)

Fee and commission expense (2,427) (411)

Net fee and commission income 1,035 1,132



26

19. Other income As at 31 December 2015, other income of AZN 1,180 primarily comprise of penalty fee from customers due to early withdrawal of term deposits.

20. Personnel, general and administrative expenses

Personnel expenses comprise:

2015 2014

Salaries and bonuses (5,451) (2,516) Social security costs (1,151) (497)

Other employee related expenses (56) (24)

Personnel expenses (6,658) (3,037)

General and administrative expenses comprise:

2015 2014

Occupancy and rent (1,680) (694) Marketing and advertising (520) (126) Communication (332) (211) Security (275) (210) Deposit insurance expense (242) (105) Operating taxes (233) (288) Office Supplies (193) (57) Legal and consultancy (118) (121) Repair and maintenance of property and equipment (106) (104) Data processing (85) (60) Utility Expenses (68) (32) Business travel and related expenses (42) (31)

Other (256) (118)

Total general and administrative expenses (4,150) (2,157)

21. Risk management

Introduction

Risk is inherent in the Bank’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is exposed to credit risk, liquidity risk and market risk. It is also subject to operating risks. The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Bank’s strategic planning process. Risk management structure

The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separate independent bodies responsible for managing and monitoring risks. Board of Directors

The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and principles. Audit Committee

The Audit Committee has the overall responsibility for the establishment and development of the audit mission and strategy. It is responsible for the fundamental audit issues and monitoring Internal Audit’s activities. Management Board

The Management Board has the responsibility to monitor the overall risk process within the Bank.



27

21. Risk management (continued)

Introduction (continued) Risk Committee

The Risk Committee has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. It is responsible for the fundamental risk issues and manages and monitors relevant risk decisions. Risk Management

The Risk Management Department is responsible for implementing and maintaining risk related procedures to ensure an independent control process. Bank Treasury

Bank Treasury is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily responsible for the funding and liquidity risks of the Bank. Internal Audit Risk management processes throughout the Bank are audited annually by the internal audit function that examines both the adequacy of the procedures and the Bank’s compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Committee. Risk measurement and reporting systems The Bank’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Bank also runs worse case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur. Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risks types and activities. Information compiled from all the businesses is examined and processed in order to analyse, control and identify early risks. This information is presented and explained to the Management Board, the Risk Committee, and the head of each business division. The report includes aggregate credit exposure, hold limit exceptions and liquidity ratios. On a monthly basis detailed reporting of industry, customer and geographic risks takes place. Senior management assesses the appropriateness of the allowance for credit losses on a quarterly basis. The Board of Directors receives a comprehensive risk report once a quarter which is designed to provide all the necessary information to assess and conclude on the risks of the Bank. For all levels throughout the Bank, specifically tailored risk reports are prepared and distributed in order to ensure that all business divisions have access to extensive, necessary and up-to-date information. A daily briefing is given to the Management Board and all other relevant employees of the Bank on the utilization of market limits and liquidity, plus any other risk developments. Risk mitigation The Bank actively uses collateral to reduce its credit risks. Excessive risk concentration Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry. In order to avoid excessive concentrations of risks, the Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.



28

21. Risk management (continued) Credit risk Credit risk is the risk that the Bank will incur a loss because its customers, clients or counterparties failed to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits. The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system. The credit quality review process allows the Bank to assess the potential loss as a result of the risks to which it is exposed and take corrective action.

Credit-related commitments risks

The Bank makes available to its customers guarantees which may require that the Bank make payments on their behalf. Such payments are collected from customers based on the terms of the letter of credit. They expose the Bank to similar risks to loans and these are mitigated by the same control processes and policies. The maximum exposure to credit risk for the components of the statement of financial position, before the effect of mitigation through the use of master netting and collateral agreements, is best represented by their carrying amounts. Where financial instruments are recorded at fair value, the carrying value represents the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values. For more detail on the maximum exposure to credit risk for each class of financial instrument, references shall be made to the specific notes. Credit quality per class of financial assets The credit quality of financial assets is assessed by the Bank internal credit ratings. The table below shows the credit quality by class of asset for loan-related lines in the statement of financial position, based on the Bank’s credit rating system. The Bank classifies its credit related assets as follows: High grade – counterparties with highly liquid collaterals or strong government support, excellent financial performance, having no changes in the terms and conditions of loan agreements and no overdue in principal and interest. Standard grade – counterparties with stable financial performance, having no changes in the terms and conditions of loan agreements and no overdue in principal and interest. Sub-Standard grade – counterparties with satisfactory financial performance, having changes in the terms and conditions of loan agreements and no overdue in principal and interest. Past due but not impaired – counterparties with satisfactory financial performance, having changes in the terms and conditions of loan agreements and overdue in principal and/or interest.

Individually impaired – counterparties with satisfactory and unsatisfactory financial performance, having changes in the terms and conditions of loan agreements and overdue in principal and interest.



29

21. Risk management (continued) Credit risk (continued)

Notes

Neither past due nor impaired

Past due but not impaired

2015

Individually impaired

2015 Total 2015

High grade 2015

Standard grade 2015

Sub-standard grade 2015

Cash and cash equivalents (excluding cash on hand) 5 − 127,011 − − − 127,011

Amounts due from credit institutions 6 10,379 12,195 − − − 22,574

Loans to customers 8 Government-related loans 308,048 − 17,786 − − 325,834 Corporate loans 1,299 16,487 17,336 2,643 10,410 48,175 Loans to individuals –

consumer 695 17,593 1,139 6,418 − 25,845

Loans to individuals – entrepreneurship

1,567 5,464 − 3,293 4,373 14,697

Loans to individuals – mortgage

− 5,422 − 194 − 5,616

Other financial assets − 199 − − − 199

Total 321,988 184,371 36,261 12,548 14,783 569,951

Notes

Neither past due nor impaired

Past due but not impaired

2014

Individually impaired

2014 Total 2014

High grade 2014

Standard grade 2014

Sub-standard grade 2014

Cash and cash equivalents (excluding cash on hand) 5 − 47,879 − − − 47,879

Amounts due from credit institutions 6 − 1,346 − − − 1,346

Investment securities available-for-sale (excluding equity shares) 7 9,999 4,775 − − − 14,774

Loans to customers 8 Government-related loans 155,026 − − − − 155,026 Loans to individuals –

consumer − 5,067 21,967 4,664 − 31,698 Corporate loans − 11,331 3,521 1,607 6,180 22,639 Loans to individuals –

entrepreneurship − 2,453 6 874 1,284 4,617 Loans to individuals –

mortgage − 713 − 40 − 753

Other financial assets − 102 − − − 102

Total 165,025 73,666 25,494 7,185 7,464 278,834

An analysis of past due loans, by age, is provided below. The majority of the past due loans are not considered to be impaired. It is the Bank’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates focused management of the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Bank’s rating policy. The attributable risk ratings are assessed and updated regularly. Aging analysis of past due but not impaired loans per class of financial assets

Less than 30 days

2015 31 to 60 days

2015

61 to 90 days 2015

More than 90 days

2015 Total 2015

Loans to customers

Government-related loans − − − − −

Corporate loans 233 128 365 1,917 2,643

Loans to individuals-consumer 506 374 399 5,139 6,418

Loans to individuals-entrepreneurship 692 6 524 2,071 3,293

Loans to individuals-mortgage 141 53 − − 194

Total 1,572 561 1,288 9,127 12,548



30

21. Risk management (continued) Credit risk (continued)

Less than 30 days

2014 31 to 60 days

2014

61 to 90 days 2014

More than 90 days

2014 Total 2014

Loans to customers

Government-related loans − − − − − Corporate loans 739 360 22 486 1,607

Loans to individuals-consumer 734 501 398 3,031 4,664

Loans to individuals-entrepreneurship 131 49 156 538 874

Loans to individuals-mortgage − 40 − − 40

Total 1,604 950 576 4,055 7,185

See Note 8 for more detailed information with respect to the allowance for impairment of loans to customers. Impairment assessment The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances. Individually assessed allowances

The Bank determines the allowances appropriate for each individually significant loan on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other financial support and the realisable value of collateral, and the timing of the expected cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention. Collectively assessed allowances Allowances are assessed collectively for losses on loans to customers that are not individually significant (including credit cards, residential mortgages and unsecured consumer lending) and for individually significant loans where there is not yet objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review. The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is no objective evidence yet of impairment in an individual assessment. Impairment losses are estimated by taking into consideration of following information: historical losses on the portfolio, current economic conditions, the appropriate delay between the time a loss is likely to have been occurred and the time it will be identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. Local management is responsible for deciding the length of this period which can extend for as long as one year. The impairment allowance is then reviewed by credit management to ensure alignment with the Bank’s overall policy. Financial guarantees and letters of credit are assessed and provisions made in a similar manner as for loans.



31


Credit risk (continued)

The geographical concentration of Bank’s financial assets and liabilities is set out below: 2015 2014

Azerbaijan OECD

CIS and other

foreign countries Total Azerbaijan OECD

CIS and other

foreign countries Total

Assets Cash and cash

equivalents 213,194 14,763 14 227,971 51,356 14,763 66 66,185 Amounts due from credit

institutions 12,195 10,379 − 22,574 1,346 − − 1,346 Investment securities

available-for-sale 283 − − 283 15,229 − − 15,229 Loans to customers 401,781 − − 401,781 202,553 − − 202,553

Other financial assets 199 − − 199 102 − − 102

627,652 25,142 14 652,808 270,586 14,763 66 285,415

Liabilities Amounts due to banks

and government organizations 337,201 16,183 − 353,384 170,151 7,973 − 178,124

Amounts due to customers 252,959 3,540 4,556 261,055 59,355 − − 59,355

Other financial liabilities 970 928 − 1,898 3,283 − − 3,283

591,130 20,651 4,556 616,337 232,789 7,973 − 240,762

Net assets/(liabilities) 36,552 4,491 (4,542) 36,471 37,797 6,790 66 44,653

Liquidity risk and funding management Liquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The Bank maintains a portfolio of marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. In addition, the Bank maintains obligatory reserves with the CBAR, the amount of which depends on the level of customer funds attracted. The liquidity position is assessed and managed by the Bank based on certain liquidity ratios established by the CBAR. The CBAR requires banks to maintain instant liquidity ratio of more than 30%. As at 31 December, these ratios were as follows: 2015, % 2014, %

Instant Liquidity Ratio (assets receivable or realisable within one day / liabilities repayable on demand) 117.6 237.4

Analysis of financial liabilities by remaining contractual maturities

The tables below summarize the maturity profile of the Bank’s financial liabilities at 31 December based on contractual undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were given immediately. In accordance with the Azerbaijan legislation, the Bank is obliged to repay the principal amounts of a term deposit upon demand of a depositor. However, in line with its deposit retention history the Bank expects the average deposit tenors to exceed the contractual maturities of its customer deposits that are displayed below.



32


Liquidity risk and funding management (continued)

As at 31 December 2015 Less than 3 month

3 to 12 months

1 to 5 years

Over 5 years Total

Financial liabilities

Amounts due to banks and government organizations 22,458 327,814 6,469 4,000 360,741

Amounts due to customers 129,131 19,556 79,861 115,430 343,978

Other liabilities 1,898 − − − 1,898

Total undiscounted financial liabilities 153,487 347,370 86,330 119,430 706,617

As at 31 December 2014 Less than 3 month

3 to 12 months

1 to 5 years

More than 5 years Total

Financial liabilities

Amounts due to banks and government organizations 11,991 163,284 5,225 822 181,322

Amounts due to customers 34,028 14,755 16,589 − 65,372

Other liabilities 3,283 − − − 3,283

Total undiscounted financial liabilities 49,302 178,039 21,814 822 249,977

The table below shows the contractual expiry by maturity of the Bank’s credit related commitments. Each undrawn loan commitment is included in the time band containing the earliest date it can be drawn down. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.

Less than 3 month

3 to 12 months

1 to 5 years

Over 5 years Total

2015 31,025 53,233 1,031 − 85,289

2014 10,649 3,684 209 44 14,586

The Bank expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments.

The Bank’s capability to repay its liabilities relies on its ability to realise an equivalent amount of assets within the same period of time. There is a significant concentration of amounts due to government organizations in the period of one year. Any significant withdrawal of these funds would have an adverse impact on the operations of the Bank. This level of funding will remain with the Bank for the foreseeable future and that in the event of withdrawal of funds, the Bank would be given sufficient notice so as to realise its liquid assets to enable repayment. The maturity analysis does not reflect the historical stability of current accounts. Their liquidation has historically taken place over a longer period than indicated in the tables above. These balances are included in amounts due in less than three months in the tables above.

Market risk

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchanges, and equity prices. The Bank does not have any significant equity, corporate fixed income, or derivatives holdings.

Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Bank’s statement of profit or loss.

The sensitivity of current year profit is the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate non-trading financial assets and financial liabilities held at 31 December. The sensitivity of equity is calculated by revaluing fixed rate financial assets available-for-sale at 31 December for the effects of the assumed changes in interest rates based on the assumption that there are parallel shifts in the yield curve. However, as interest rate of available-for-sale securities in the local market is based on the carried accrued discount or premiums on these securities at the time of purchase or sale (as included in actual price of purchased or sold securities), thus, any change in the rates to be applied to the fixed-rate available-for-sale financial assets does not have any impact or effect on equity.



33


Market risk (continued)

Currency

Increase/ (decrease) in %

2015

Sensitivity of net interest

income 2015

USD

+0.50%/-0.12% (10)/2

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Management Board has set limits on positions by currency based on the CBAR regulations. Positions are monitored on a daily basis.

The tables below indicate the currencies to which the Bank had significant exposure at 31 December on its non-trading monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement of the currency rate against the manat, with all other variables held constant on the statement of profit or loss (due to the fair value of currency sensitive non-trading monetary assets and liabilities). The effect on equity does not differ from the effect on the statement of profit or loss. A negative amount in the table reflects a potential net reduction in statement of profit or loss or equity, while a positive amount reflects a net potential increase.

Currency

Increase in currency rate in %

2015

Effect on profit before tax

2015

Increase in currency rate in %

2014


2014

USD 60.00% (9.483) 35.00% 1,489 EUR 60.00% (99) 35.00% (1)

Currency

Decrease in currency rate in %

2015


2015

Decrease in currency rate in %

2014


2014

USD -15.00% 2,371 -8.74% (372) EUR -15.00% 25 -10.70% −

Operational risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it has a control framework to manage such risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, including the use of internal audit.



34

22. Fair value measurement

Fair value hierarchy The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: Fair value measurement using

Date of

valuation

Quoted prices in active markets (Level 1)

Significant observable

inputs (Level 2)

Significant unobservable

inputs (Level 3) Total

Assets measured at fair value

Investment securities available-for-sale

31 December 2015 − − 283 283

Assets for which fair values are

disclosed

Cash and cash equivalents 31 December 2015 227,971 − − 227,971

Amounts due from credit institutions

31 December 2015 − − 22,574 22,574

Loans to customers 31 December 2015 − − 401,781 401,781

Other financial assets 31 December 2015 − − 199 199

Liabilities for which fair values

are disclosed

Amounts due to banks and government organizations

31 December 2015 − − 353,384 353,384

Amounts due to customers 31 December 2015 − − 261,055 261,055

Other financial liabilities 31 December 2015 − − 1,898 1,898

Fair value measurement using

Date of

valuation

Quoted prices in active markets (Level 1)

Significant observable

inputs (Level 2)

Significant unobservable

inputs (Level 3) Total

Assets measured at fair value

Investment securities available-for-sale

31 December 2014 11,764 3,010 455 15,229

Assets for which fair values

are disclosed

Cash and cash equivalents 31 December 2014 66,185 − − 66,185

Amounts due from credit institutions

31 December 2014 − − 1,346 1,346

Loans to customers 31 December 2014 − − 202,553 202,553

Other financial assets 31 December 2014 − − 102 102

Liabilities for which fair values

are disclosed

Amounts due to banks and government organizations

31 December 2014 − − 178,124 178,124

Amounts due to customers 31 December 2014 − − 59,355 59,355

Other financial liabilities 31 December 2014 − − 3,283 3,283



35

22. Fair value measurement (continued) Fair value of financial assets and liabilities not carried at fair value Set out below is a comparison by class of the carrying amounts and fair values of the Bank’s financial instruments that are not carried at fair value in the statement of financial position. The table does not include the fair values of non-financial assets and non-financial liabilities.

Carrying value 2015

Fair value 2015

Unrecognized gain/(loss)

2015

Carrying value 2014

Fair value 2014

Unrecognized gain/(loss)

2014

Financial assets

Cash and cash equivalents 227,971 227,971 − 66,185 66,185 −

Amounts due from credit institutions 22,574 22,574 − 1,346 1,346 −

Loans to customers 401,781 385,872 (15,909) 202,553 201,968 (585) Other financial assets 199 199 − 102 102 − Financial liabilities

Amounts due to banks and government organizations 353,384 350,549 (2,835) 178,124 172,099 (6,025)

Amounts due to customers 261,055 249,535 (11,520) 59,355 58,955 (400)

Other financial liabilities 1,898 1,898 − 3,283 3,283 −

Total unrecognised changes in unrealised fair values (30,264)

(7,010)

Valuation techniques and assumptions The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the financial statements. Assets for which fair value approximates carrying value For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and savings accounts without a specific maturity. Investment securities available-for-sale Investment securities available-for-sale valued using a valuation technique or pricing models primarily consist of unquoted equity and debt securities. These securities are valued using models which sometimes only incorporate data observable in the market and at other times use both observable and non-observable data. The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates. Financial assets and financial liabilities carried at amortized cost The fair value of unquoted instruments, loans to customers, customer deposits, amounts due from credit institutions and amounts due to banks and government organizations and other financial assets and liabilities, obligations under finance leases is estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.



36

23. Maturity analysis of assets and liabilities The table below shows an analysis of assets and liabilities according to when they are expected to be due or settled. See Note 21 “Risk management” for the Bank’s contractual undiscounted repayment obligations.

2015 2014

Within one year

More than one year Total

Within one year

More than one year Total

Cash and cash equivalents 227,971 − 227,971 66,185 − 66,185

Amounts due from credit institutions 11,095 11,479 22,574 1,188 158 1,346

Investment securities available-for-sale − 283 283 710 14,519 15,229

Loans to customers 363,181 38,600 401,781 168,251 34,302 202,553

Property and equipment − 6,469 6,469 − 814 814

Intangible assets − 1,526 1,526 − 306 306

Current income tax assets − 508 508 − 437 437

Deferred income tax assets − 1,355 1,355 − 675 675

Other assets 1,111 − 1,111 693 − 693

Total 603,358 60,220 663,578 237,027 51,211 288,238

Amounts due to banks and government organizations 343,616 9,768 353,384 169,717 8,407 178,124

Amounts due to customers 149,820 111,235 261,055 47,977 11,378 59,355

Other liabilities 3,230 - 3,230 3,518 − 3,518

Total 496,666 121,003 617,669 221,212 19,785 240,997

Net 106,692 (60,783) 45,909 15,815 31,426 47,241

24. Related party disclosures

In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Government of the Republic of Azerbaijan, acting through the Shareholders, controls the Bank activities. The Government of the Republic of Azerbaijan directly and indirectly controls and has significant influence over a significant number of entities through its government agencies and other organizations (together referred to as “government institutions”). The Government of the Republic of Azerbaijan does not provide to the general public or entities under its ownership/control a complete list of the entities, which are owned or controlled directly or indirectly by the government. Under these circumstances, the management of the Bank disclosed only information that its current internal management system allows to present in relation to operations with government-controlled entities and where the management believes such entities could be considered as government-controlled based on its best knowledge. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. The volumes of related party transactions, outstanding balances at the year end, and related expense and income for the year are as follows:



37

24. Related party disclosures (continued)

2015 2014

Share-holders

Entities under

common control

Key manage-

ment personnel

Share-holders

Entities under

common control

Key manage-

ment personnel

Loans outstanding at 1 January, gross − 155,026 60 − − 65

Loans issued during the year − 21,238 31 − 154,943 334 Loan repayments during the

year − (3,501) - − − (336) Effect of translation

difference − 153,086 -

Other movements − (15) - − 83 (3)

Loans outstanding at 31 December, gross − 325,834 91 − 155,026 60

Less: allowance for impairment at 31 December − (986) (10) − − (4)

Loans outstanding at 31 December, net − 324,848 81 − 155,026 56

Interest income on loans − 6,281 3 − 84 3 Impairment charge − (986) (6) − − (1)

2015 2014

Share-holders

Entities under

common control

Key manage-

ment personnel

Share-holders

Entities under

common control

Key manage-

ment personnel

Deposits at 1 January − 155,024 − − − 5

Deposits received during the year 12,119 3,809 16 − 154,958 29

Deposits repaid during the year − (3,809) − − − (34)

Effect of translation difference − 153,101 − − − −

Other movements 11 446 1 − 66 −

Deposits at 31 December 12,130 308,571 17 − 155,024 −

Current accounts as of 31 December 1 22,176 8 − 784 98

Interest expense on deposits 141 523 9 − 66 1 Other operating expenses − 909 − − 169 − Operating income 276 517 3 − − 3

Compensation of key management personnel is as follows: 2015 2014

Salaries and other benefits 566 417

Social security costs 125 60

Total key management personnel compensation 691 477

For the year ended 31 December 2015, key management personnel comprised of nine (2014: thirteen) members.

25. Capital adequacy The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Bank’s capital is monitored using the ratios established by the CBAR in supervising the Bank. The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders’ value.



38

25. Capital adequacy (continued) The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.

CBAR capital adequacy ratio The CBAR requires banks to maintain a minimum Tier 1 and total capital adequacy ratio of 5% (2014: 6%) and 10% (2014: 12%), respectively, of risk-weighted assets for regulatory capital. As at 31 December 2015 and 2014, the Bank’s capital adequacy ratios on this basis were as follows: 2015 2014

Tier 1 capital 45,840 51,544 Tier 2 capital 5,509 2,674

Less: deductions from capital (458) (458)

Total regulatory capital 50,891 53,760

Risk weighted assets 491,055 225,196

Capital adequacy ratio (Tier 1) 9.34% 22.89% Capital adequacy ratio (Total Capital) 10.36% 23.87%

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